Finding the right term deposit for your situation can help you reach your savings goal faster. We understand that not all investors are the same, so we’ve compared a range of term deposits with competitive interest rates and different term lengths.
What is a term deposit and why should you invest in one?
A term deposit is an account that is opened for a certain period, for example, 12 months, but they can also be as long as 5 years. During this period your funds are locked, so you can’t access it (penalties apply if you do). Your money earns interest according to the interest rate stated by the financial institution when opening the account. This interest rate is fixed, meaning it won’t change throughout the life of the term. After the period has ended, you can choose to reinvest a portion or all of the funds at the interest rate stated by your bank, or you can withdraw the funds.
Term deposits are widely considered to be a safe, low-risk investment as, unlike savings accounts, they offer a guaranteed return through a fixed interest rate. Because your money is locked away, banks often offer a higher interest rate on some term deposits than they do on regular savings accounts. If you have a chunk of money you know you won’t need for a while, a term deposit could be a good option. It removes the temptation to spend the money as you need to pay a fee if you wish to withdraw it before the term is finished.
And what are the downsides?
While term deposits protect you against falling interest rates, they also don’t allow you to take advantage of any interest rate rises that occur. If rates go up while your funds are locked away in a term deposit, you can’t invest your funds at a higher rate until your deposit matures.
Another downside of a term deposit is that you can’t access your money while it is in the account. If you do need to make a withdrawal you need to give at least 31 days notice and are charged a fee for accessing your money before the term has finished. You could also be charged an interest rate penalty, which could defeat the purpose of the investment in the first place. In cases of extreme financial hardship, this rule can be waived.
How do I earn interest with a term deposit?
A term deposit provides a fixed interest rate in return for investing your money for a set amount of time. For example, if you opt for a 12-month term deposit you lock away your funds for one year and you can’t withdraw the money. In return, your bank awards you a competitive interest rate that’s traditionally higher than a savings account.
You can elect to receive interest payments monthly or all at once after your term deposit reaches maturity. You may be able to elect which New Zealand bank account you’d like to receive your interest payments into. Remember, if you do need to make an early withdrawal, you are charged fees and lose some of the interest you have earned.
Use our term deposit calculator to find out how much interest you could earn.
Term deposit calculator
*Whilst every effort has been made to ensure the accuracy of this calculator, the results should only be used as an indication. They are neither a recommendation nor an eligibility test for any product and should not be construed as financial advice, investment advice or any other sort of advice.
Paying tax on your term deposit interest
As a New Zealand resident, you must pay tax on the income you receive each year, including interest income from savings term deposits.
The amount of tax you need to pay on your term deposit interest depends on your overall taxable income, and when you receive your interest payments:
If your term deposit has a term of less than one year. You need to declare any interest payment you receive in your tax return for that year.
For money invested for longer than 12 months. When you declare your interest income depends on when the interest is paid on your account.
If interest is paid at maturity. You need to declare interest on your tax return for the year in which your investment matures.
Interest credited to you throughout the term. For example, if you receive monthly or half-yearly interest payments, you need to declare any interest earned for the financial year in which it was credited to your account.
With joint term deposits, the interest payments are split equally
If your term deposit is a joint account, for example, you share ownership with your partner, the IRD assumes that each person has equal ownership of the funds. The interest paid each financial year is therefore equally split between each account holder, ie 50% each if there are two account holders and 25% each if there are four account holders. However, if beneficial ownership of the account is not split into equal shares, you need to provide documentation to the IRD to prove the amount of your share.
Providing your IRD number to your bank helps at tax time
When you apply for a term deposit, one of the questions the bank asks is whether you wish to provide your IRD number. Although this is not compulsory, doing so is worth your while and helps at tax time.
If you don’t provide your IRD number, the bank has to deduct resident withholding tax from the interest you earn and send it straight to the IRD number. The bank makes the deduction at the non-declaration rate of 45%, which may be a lot higher than your correct tax rate.
Tax tips for term deposits
Want to minimise the tax you have to pay on term deposit interest? Keep the following tips in mind:
Plan your interest payments. Consider your likely tax liability for the financial year ahead. If you’re planning on having a term deposit mature in that year, will the interest payments you receive move you into a higher tax bracket? By structuring your term deposit interest payments carefully, you can reduce the risk of being stuck with a hefty tax bill in any given year.
Structure your term deposits. If you earn more income than your partner and you’re likely to face a sizable tax bill, you might want to consider structuring new term deposits so that they’re held in your partner’s name or perhaps owned jointly.
With careful planning and an eye to the future, you can make sure you always meet your obligations to the IRD, and hopefully ensure that you’re never stuck with a tax bill you can’t afford.
Term deposit versus a savings account
The main difference between a savings account and a term deposit is the ability to access your money. The money in a savings account can be accessed whenever you need it, and there are no costs for withdrawing or depositing money. Term deposits are locked and charge you if you need to withdraw your money early. So, if you want easy access to your money, then a term deposit might not be right for you.
Another key difference is the interest rate; savings accounts have variable interest rates meaning they can change, while term deposits have fixed interest rates meaning the rate does not change until the term matures.
How to get the best term deposit rate
Like most financial products, there is no best term deposit account. The account that suits your needs and circumstance is the best one for you. Make sure to keep the following features in mind when comparing the benefits of term deposits:
Interest rate.Interest rates vary between banks, so it’s essential to shop around for the account that allows you to earn the highest rate of interest on your deposit. Even a small difference in interest rates can make a substantial difference to your balance at the end of an investment term, so don’t hesitate to compare all your options.
Frequency of interest payments.Check to see when your account pays interest – monthly, quarterly, half-yearly, annually or at maturity – and what effect this has on your balance at the end of the term.
Fees.Make sure you’re aware of any fees that apply to your account, such as ongoing account-keeping fees. There are many term deposit accounts out there that don’t charge any ongoing fees, so keep an eye out for any other charges.
Loyalty bonuses.Some banks provide a loyalty bonus if, when your term deposit matures, you decide to roll over your balance into another term deposit. This loyalty reward usually takes the form of a bonus interest rate on your account.
Linked account requirements.If you want to open a term deposit, some banks also require you to open a linked account from which you can transfer funds to your term deposit. If this is the case, make sure you’re aware of any fees that apply to this account.
Minimum balance requirements.Most banks impose a minimum deposit requirement on their term deposit accounts, which typically ranges from $1,000 to $10,000 or even higher. Therefore, some accounts may not be suitable for your circumstances.
Duration. If you have a specific term length for which you want to lock away your savings and earn interest, it’s crucial to compare the different interest rates available for your desired term length.
What happens when the deposit matures.Some banks automatically roll your funds over into a new term deposit when your account matures. Make sure you’re aware of what happens to your funds at the end of the investment term so that you can take control of your finances.
Steve chooses a term deposit
As a make-believe example, let’s pretend 32-year-old tradie Steve wants to invest $10,000 in a 5-year term deposit.
When he compares the accounts available from the two banks of which he is already a customer, Steve discovers a slight difference in the interest rates on offer – Bank A offers 2.75% p.a. while Bank B offers 3.25% p.a. Both accounts pay interest monthly, so Steve compares the accounts to see just how much difference a higher rate makes to his end balance.
Bank A
Bank B
Interest rate
2.75% p.a.
3.25% p.a.
Investment term
5 years
5 years
Interest paid
Monthly
Monthly
Balance after 5 years
$11,472.21
$11,761.90
Total interest paid
$1,472.21
$1,761.90
As you can see, even though the interest rate from Bank B is only 0.50% p.a. higher, this works out to be a difference of $289.69 at the end of the investment term.
Term deposits for children
A child’s term deposit is a term deposit account that allows anyone under 18 years of age to open an account. While many term deposits are available only to applicants aged 18 or over, some banks offer accounts eligible to children over 12 years of age or even offer accounts with no minimum age requirements.
If your child opens a regular savings account that provides easy access to their funds, they may be tempted to dip into their savings on a regular basis. Locking their funds away in a term deposit ensures that they save their money rather than spend it.
However, it’s important to remember that you may have to pay tax on the interest earned from a term deposit, even if the account is held in your child’s name.
Check the fine print to make sure you know what happens to your money when the term ends. Some banks simply pay the deposit and interest into another account, while others may roll the funds over into a new term deposit. Instead of automatically accepting this rollover, make sure you compare the term deposits available from other banks to make sure you are getting a competitive interest rate.
Frequently asked questions
Banks apply their own restrictions depending on how their accounts are structured. Some banks allow Kiwis as young as 12 years old to open a term deposit.
Yes, you are expected to put money into the term deposit immediately after the account has been opened.
You need to check the minimum balance requirements of various banks, as some allow for $1,000 deposits while others require a minimum investment amount of $5,000.
You can only deposit money when first opening your term deposit, you can’t top it up.
Yes, not only do some online financial institutions offer long term deposit accounts, but many regular banks also provide access to the account through their e-banking network.
Yes! Most term deposits calculate interest daily, meaning you earn interest on your interest.
You should have identification documentation so you can prove who you are – for example, your driver’s licence. These types of accounts are only available to New Zealand residents with a New Zealand residential address.
Finder is not giving an opinion or making a recommendation that the user should acquire or dispose of the relevant financial product.
Shirley Liu is Finder's global program manager. She was previously the publisher for banking and investments and has also written comparisons for energy, money transfers, Uber Eats and many other topics. Shirley has a Master of Commerce and a Bachelor of Media, Journalism and Communications from the University of New South Wales. She is passionate about helping people find the best deal for their needs.
With the help of a term deposit calculator you get a better idea of how much you need and for how long to invest so you can meet your financial goals.
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